What are The Types of Home Loans and which is Best Suited For You?

Owning a home can seem like a Herculean task in the face of rising real estate prices due to inflation and growing consumer demand. As such, most individuals may now only be able to afford to buy a home with the help of a home loan. Fortunately, financial institutions offer several home loan instruments to help customers meet their requirements and residential aspirations of various types that have been described below. 

5 Different Types of Home Loans in India

Loan For Purchasing a Home

A loan for purchasing a home is the most typical kind of mortgage you can use to buy a new or used house. Depending on your qualifications, the lender may issue a home loan for up to a certain percentage (usually 75%–90%) of the property’s worth. 

The lender will need you to make monthly EMI payments after you take out a home loan throughout the loan tenure, which may range up to 30 years. Further, you should pay close attention to the interest rate the lender charges, as you will be borrowing a large sum to buy your dream home. Thus, even the slightest variations in interest rates might result in significant monetary differences. 

Home Construction Loan

Many land-owning families and individuals prefer to build their own homes. Therefore, they typically employ an architect or contractor/developer to plan the layout of their home, which they build on a plot they already own.

In such cases, the lender would receive the estimate and the required paperwork to apply for a loan to build a house. When your paperwork is in order and you meet the requirements, the lender will accept your loan application, giving you the money you need to start construction. Depending on the requirements and conditions, the lender will either directly pay you or to the contractor/developer.

Plot and Home Construction Loan

A loan for plots and construction is another common type of mortgage. This kind of loan may be the best choice if you want to construct your own home from the ground up. A plot and home construction loan is for people who want to buy land and build their home on it, as opposed to a home construction loan obtained by people who already own the land. 

For a plot and home construction loan, the lender often disburses the loan amount in modest instalments based on the project’s development progress. You must inform the lender of the purchase and building progress to get the next payment. Similar to a typical home loan, a lender will often issue a loan sum that is a percentage of the project’s total cost.

Home Improvement or Renovation Loan

If you currently own a property, you may be eligible for a loan for critical repairs, interior or exterior home upgrades, or both. Many lenders in India offer home renovation or repair loans at affordable interest rates, so you do not need to pay the entire project’s cost upfront.

Once your loan is authorised, you can renovate or improvise your house. A home repair loan typically proves to be more affordable and convenient to obtain when compared to other commercially available lending options, such as home construction loans.

Home Extension Loan 

Banks, Non-Banking Financial Corporations (NBFCs) and Housing Finance Corporations (HFCs) provide home extension loans to those who want to expand or add additional space to their current residential property. Both new clients and current borrowers of home loans are eligible for home extension loans from lenders. Most lenders offer this facility as an independent option within the larger category of home loans or as part of their standard home loan package.

Apart from these five types of home loans, there is also the option of a Home Loan Balance Transfer. This facility allows you to transfer your ongoing Home Loan to a new lender to leverage better interest rates and make possible savings on your current EMI amount. 

Eligibility Criteria 

Your loan application will only be accepted if you meet the lender’s eligibility requirements, regardless of the type of home loan you choose. Even though there may be a few variations, most lenders have, broadly speaking, similar eligibility requirements. Among the most crucial points to be remembered are the following:

• The applicant should be at least 18 years old.
• For self-employed applicants, the maximum age at loan maturity is 70 years, while for salaried applicants, the maximum age is 60 years of age
• ₹25,000 minimum monthly income is generally preferred
• A minimum of two to three years of work experience may be required for applicants who are salaried employees 
• Three to five years of business experience, if you are self-employed may be required.
• Your CIBIL score should be at least 750. However, you can avail a home loan with a low score as well, but with higher interest rates
• The maximum loan amount could range from 75 to 90% of the property’s cost

Of course, the criterion will differ from lender to lender and you should be well aware of these once you speak with them.

Documentation Required for Home Loans in India

You will need to provide several documents in addition to meeting the eligibility requirements for the loan to be accepted. Additional documentation may be required depending on the lender you choose and even the type of loan you seek. You will need the following standard paperwork to apply for certain types of home loans in India:

1. Identity and address proof documents, such as Aadhar cards, voter ID cards, passports, ration cards, utility bills, etc.
2. Income evidence through balance sheets and income statements.
3. The most recent six-month bank statement.
4. Property records, such as land deeds.
5. Evidence of other income sources (if any).

Fees and Other Charges for Home Loans

Even though most borrowers are primarily concerned with the interest rate of their home loan, there are a few other fees that you should be aware of:

• Loan Processing Fee: To get your loan processed by the lender, you will need to pay a processing fee ranging from 1% to 2% of the loan amount
• Pre-Payment Charges: You can partially prepay various home loans before your loan’s actual term ends. This means paying a chunk of the principal amount in a lump sum to reduce your interest on future EMI payments. However, this option sometimes carries a prepayment fee of the outstanding principal amount. Some lenders don’t charge a prepayment fee if your loan has a floating interest rate
• Penalty for EMI Default: If you miss any EMI payments, you will be charged a penalty. Depending on the lender, the fine may range from 1% to 2% of the EMI amount for each month of non-payment. 
• Pre-Closure Quote Fee: Pre-closure involves repaying the entire loan amount before the tenure ends. Banks charge a foreclosure fee plus taxes based on whether you pre-close your loan before the end of the term.
• Copy of / Duplicate documents: The banks can sometimes also levy charges for requesting a copy of the repayment schedule or duplicate statements.

Conclusion

Financial institutions today provide a wide range of loan products in India to cater to the needs of all types of consumers. Therefore, you can choose a home loan that best meets your needs after learning about the various types available.

To decide on the most appropriate lender, consider the lender’s reputation, interest rates, costs, maximum loan amount, loan term, and eligibility conditions. Before signing the loan agreements, ensure that you understand all the terms and conditions to avoid any misunderstandings or unforeseen fees later. 

Frequently Asked Questions